High-yield corporate bonds are off to a solid start in 2021, but data indicate market participants are retreating from the asset class. Investors can calm their nerves with the FlexShares High Yield Value-Scored Bond Index Fund (HYGV).
HYGV’s index reflects the performance of a broad universe of U.S.-dollar denominated high yield corporate bonds that seeks a higher total return than the overall high yield corporate bond market, as represented by the Northern Trust High Yield US Corporate Bond IndexSM. The fund generally will invest under normal circumstances at least 80% of its total assets (exclusive of collateral held from securities lending) in the securities of its index.
“The ICE BofA High Yield Index returned 0.4% in January, with the riskiest non-defaulted bonds posting an especially strong total return of 1.6%,” reports Alexandra Scaggs for Barron’s. “So investor withdrawals from high-yield bond funds are puzzling, and contrast especially sharply with inflows into higher-rated corporate bonds: $26 billion over the four weeks ended Jan. 27, according to Lipper.”
HYGV, which yields 6.19%, is more or less flat since the start of the year.
HYGV: A Good Bet in this Climate
With its unique scoring methodology, HYGV offers investors a potentially better mousetrap for junk bonds, especially for those seeking long-term, yield-bearing allocations.
“There are a few potential explanations for high-yield bonds’ relative lack of popularity despite their outperformance. Investors could be favoring the stock market over high-yield bonds in an attempt to capture some of the gains in so-called meme stocks,” reports Scaggs.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizing Northern Trust Credit Scoring methodology to eliminate the bottom 10% of issuers; performing liquidity assessment based on issuer’s debt outstanding, age, and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intending to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index) while maintaining sector neutrality.
Underscoring the benefits of HYGV’s quality approach is a spate of new issuance flowing into the junk bond market this year.
“Notably, instead of a rush to the stock market, there has been a wave of bond issuance by junk-rated companies this year. Companies have sold $58 billion in high-yield bonds so far this year, 25% more than the comparable period last year. That was better for those companies’ shareholders than their bondholders, as it raises cash without diluting those shareholders’ stakes,” concludes Scaggs.
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